Standing Committee D

[John Bercowin the Chair]

Motion made, and Question proposed,
That—
(1) during the remaining proceedings on the Company Law Reform Bill [Lords] the Standing Committee shall meet—
a. at 10.30 a.m. and 4.30 p.m. on Tuesday 11th July;
b. at 9.00 a.m. and 1.00 p.m. on Thursday 13th July;
c. at 10.30 a.m. and 4.30 p.m. on Tuesday 18th July;
d. at 9.00 a.m. and 12.30 p.m. on Thursday 20th July;
(2) the proceedings shall (so far as not previously concluded)be brought to a conclusion at 2.00 p.m. on Thursday20th July.—[Margaret Hodge.]

Crispin Blunt: We appreciate the two extra days that the Programming Sub-Committee is offering. Obviously, it will still not be possible to deal with the large number of consolidation clauses, which will have to be dealt with at some point. We would have preferred to have had the chance to come back after the summer recess to consider them and to consult on them externally. However, we are grateful for the extension of the sittings and support the view of the Programming Sub-Committee.

Question put and agreed to.

Clause 142

Minimum age for appointment as director

Amendment moved [this day]: No. 148, in clause 142, page 63, line 38, leave out subsection (5).—[Mr. Djanogly.]

John Bercow: I remind the Committee that with this we are discussing the following amendments:No. 149, in clause 143, page 64, leave out lines 12 and 13.
No. 150, in clause 144, page 64, line 28, at end insert 
‘unless, before section 142 comes into force, the company has appointed a natural person over the age of 16 to be a further director.’.

Jonathan Djanogly: I was speaking to amendment No. 148 to clause 142, and I was saying that we found it illogical that different parts of the country should be able to have different policies on whether children—people under the age of 16—could be directors. The Government might have an explanation of why the provisions are necessary, and I would be grateful to hear it if it exists.
I turn to amendment No. 150. Clause 144 provides that existing directors under the age of 16 will cease to be so on enactment. We think that the clause is quite harsh, in so far as it is retrospective, and such legislation is normally unfair on people who are affected. I can see why we should change the law from now on, but I can also see why the average under 16-year-old entrepreneur might feel aggrieved that their officer roles will be snatched away from them bythe Government. Our compromise is that if the Government have appointed a natural person over the age of 16 to be a further director, the director who is under 16 years old should be able to remain in situ. That is simply realistic, rather than mums and dads being put in as directors while the founding 15-year-old entrepreneur is still there pretty much as a shadow director.

James Brokenshire: Will my hon. Friend comment on the retrospection and whether he is aware that Companies House is geared up to monitor the provision? Presumably, it would be a requirement to show on the register that a director had ceased to be a director on a particular date, given that those people would already be shown by virtue of the filing of form 288 to be a director in the first place.

Jonathan Djanogly: My hon. Friend makes an important point. I think that the way in which the provision will work is that they will disappear as directors on the day concerned. The Bill covers his point, but it does not cover the basic unfairness, as those who are already directors might have obligations. We are assuming that such companies do not do anything, but they might be successful and have made commitments and entered into contracts. People might have relied on those young people’s words as directors and suddenly to snatch that all away could put a section of the community into a highly embarrassing position.
We would like to hear the Minister’s views, but we are strongly in favour of amendment No. 150.

Margaret Hodge: I shall deal first with amendment No. 148. It is our view—in a sense, what the hon. Member for Huntingdon (Mr. Djanogly) said confirms that it might also be his view—that someone who happens to be under the age of 16 who has done something that is found to be unlawful should face the same possibility of criminal action as anyone else. If the hon. Gentleman believes that really talented young entrepreneurs who are effectively acting as directors should not be subject to the criminal consequences of their actions—that would be the result of removing subsection (5)—it would be somewhat inconsistent. It is our view that we should not provide any exemption from the possibility of criminal prosecution of those aged under 16 who act as directors.
The provisions for directors now under the age of 16 will obviously have to be dealt with through the transitional provisions; we can make sensible, practical arrangements. However, there may be exceptions, which is why we have left ourselves a little leeway. For example, a charitable company associated with youth work may be an exception to what must be regarded as a sensible general rule.

Jonathan Djanogly: The Minister speaks of exceptions, but the Bill already provides for individual exceptions, so would the Department be lenient or accepting of those under the age of 16 who are currently directors who want to stay on as directors?

Margaret Hodge: On the whole, the matter is better dealt with under the transitional arrangements. I am being passed helpful bits of paper as I speak. We will consider that point. If it makes sense to make transitional arrangements, we will do so.
When considering the provisions of the clause, we wondered whether it would be sensible to permit all existing under-age directors to continue in office after the Bill becomes law. Some are extremely young, although given the parliamentary question that the hon. Gentleman asked and his research into the question, he probably knows that. Odd though it may seem to some Members, it has become fashionable to give directorships as christening presents. However, although perfectly sensible and practical transitional arrangements could be made to fit individual circumstances, a blanket agreement that those under the age of 16 who are currently directors could continue would be wrong.
I turn to amendment No. 149. Clause 143(4) allows regulations making exceptions to the under-age ban to vary in different parts of the United Kingdom. The hon. Gentleman asked why that is so. We believe that it is proper to provide for the differences in law on age in the various countries of the UK. Like the hon. Gentleman, I think it unlikely that we will ever have to take advantage of the provision, but it is better to have it in the Bill rather than to find that what we want to do is outside the legislation.

Jonathan Djanogly: We know that the provision is irrelevant to Scotland, because there are no Scottish under-age directors. We are talking about England and Wales—I am not sure about Northern Ireland. Will the Minister please explain which parts of England and Wales might have a habit or custom of having directors under the age of 16?

Margaret Hodge: It is right that currently there are not any in Scotland, which has different age provisions for all sorts of legal permissions necessary to take part in certain activities or to access services. However, the provision should be in the Bill. It is highly unlikely that we would ever want to use it, but it is better to have it in there so that if we did want to use it we could regulate from it.

Jonathan Djanogly: To deal with the last point first, the Minister’s position on amendment No. 149 confounds me. No examples have been given in the notes, by her today or in the Lords debates of why one part of the country should need under-age directors. I see no justification for making them under-age; I am rather in the dark on that one. I admit that it is perhaps not the most important issue in the Bill, but one wonders why it is there in the first place.

Margaret Hodge: In case.

Jonathan Djanogly: In case—that ancient remark of the civil servant.
Having heard the Minister’s comments, amendment No. 150 appears to deal with a more important issue. We are assuming that young people will not have serious companies. In relation to another amendment, I asked, “Could that apply to individuals or groups of people?” In response, the Minister gave the example of schoolchildren becoming directors as part of a project. That might be an example of where group provisions would be useful. That was not what I was getting at, however. I was talking about an individual under the age of 16 who sets up a company. Will they be able to approach the Department of Trade and Industry and present a fair case for their business and directorship? If so, will the Secretary of State hear sympathetically their case for why they should be a director? They should be given a sympathetic hearing.
For the past 200 years people under 16 have been allowed to be directors—and suddenly we are saying that they cannot be directors. I accept that in future they should not be, but those who are directors now should be able to remain so. We could be affecting young people’s dreams of setting up a company or their livelihoods. For all we know, many of the companies involved could be successful, from which the individuals derive an income. So we could be taking away somebody’s ability to earn a living. Historically, many of our most successful entrepreneurs started at school or university, or while employed and working second jobs.
The Minister has not appreciated the seriousness of my point. It is all very well for her to say that the issue will be covered in transitional provisions, but that is not good enough. We would like provisions in the Bill for young people who are currently directors. That is why I shall be pressing amendment No. 150 to a Division.

Margaret Hodge: Of course I recognise that there are some incredibly talented young people. I wonder whether Mozart would have claimed his IPR rights at the age of five, or whenever it was that he first composed music.
There are considerations, but we view the exceptions as classes rather than individuals. That is where we differ from the hon. Gentleman. We may want to make exceptions among classes, hence the power to do so. I gave the example of a company that is set up to foster some youth activity and is trading as such.
There is an oddity, in that in the House of Lords—I am sure that the hon. Gentleman has read the debate—members of his party were against anybody under 18 becoming a director. [Hon. Members: “Under 80.”] Under 80! Anyway, there is an anomaly in the hon. Gentleman’s position.
One has to take a sensible decision. The Committee can vote if the hon. Gentleman so wishes, but I have assured him that we will consider transitional arrangements and ensure that we do not catch anybody who is currently a director. We will make some sensible, practical arrangements to deal with them. We will consider classes—companies such as the one in my example exist—but not individuals. In that context, this is a sensible way forward. On the whole, we want those who are under 16 to be putting their energy, vigour, initiative and everything else into achieving higher qualifications in the education system rather than into other things.

Jonathan Djanogly: I thank the Minister for that clarification and repeat our disagreement with her position. She mentions that exceptions will be made for classes, but we think that they should be made for individuals. On that basis, I shall pursue amendment No. 150 instead. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 142 ordered to stand part of the Bill.

Clause 143

Power to provide for exceptions from minimum age requirement

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: I have two brief points to make. First, will the Minister confirm that the clause could be used to cater for individual circumstances rather than classes of people? I believe that we have already had an answer to that. Secondly, to what extent will the Minister be open-minded about granting waivers in respect of classes? We note the negative resolution procedure, but would a less formal administrative mechanism be more appropriate, and could such a mechanism be introduced by regulation?

Margaret Hodge: That is an interesting concept, and I have no objection to considering whether it would be appropriate. However, I have to say to the hon. Gentleman, no on the individuals, yes on the classes. Of course we will have full consultation on the regulations before the power is used.

Question put and agreed to.

Clause 143 ordered to stand part of the Bill.

Clause 144

Existing under-age directors

Amendment proposed: No. 150, in clause 144, page 64, line 28, at end insert—
‘unless, before section 142 comes into force, the company has appointed a natural person over the age of 16 to be a further director.’.—[Mr. Djanogly.]

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 10.

Question accordingly negatived.

Clause 144 ordered to stand part of the Bill.

Clause 145

Appointment of directors of public company to be voted on individually

Jonathan Djanogly: I beg to move amendment No. 151, in clause 145, page 64, line 37, leave out from first ‘made’ to end of line 38.
The idea behind the clause is certainly sound. The bad old practice of grouping directors together and having them voted through en bloc, normally at the AGM, is not good corporate governance practice. Votes should be taken individually on each director. Having separate resolutions also gives shareholders the chance to ask questions concerning each director.
In an age in which institutions are quite properly taking more of an interest in making recommendations based on each director, and often related to the independence of non-executive directors, single resolutions certainly make sense. However, I note from the second half of subsection (1) that the old provision for bloc voting is to remain, subject to the condition that the company has voted for it. I am surprised that that provision has been carried over into the Bill. Will the Minister please provide an example of when that might be necessary?

Margaret Hodge: If I may, I shall turn that question back on the hon. Gentleman. The provision simply takes from section 292 of the 1985 Act. To the best of my knowledge, that provision has not caused any problems. If he has a good reason for changing it, I shall listen. But if it ain’t broke, why fix it?

Jonathan Djanogly: I tried to explain that, effectively, it is a redundant provision. We do not see it used any more—at least I have never seen it used. Will the Minister say when it would be used? Certainly, it goes against all general views on corporate governance. That made me think that as we reconsider the Companies Bill every 20 years, it might be worth removing the provision.

Margaret Hodge: The provision allows flexibility for companies because the agreement must be unanimous, not by majority. The counterview is that if we remove that flexibility, regulatory Government diktat would increase. So we have left it as it is.

Jonathan Djanogly: I think that I have made my point. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 104, in clause 145 , page 65, line 4, leave out ‘altering’ and insert ‘amending’.—[Margaret Hodge.]

Clause 145, as amended, ordered to stand part of the Bill.

Clause 146 ordered to stand part of the Bill.

Clause 147

Register of directors

Jonathan Djanogly: I beg to move amendment No. 270, in clause 147, page 65, line 18, leave out ‘to’ and insert ‘, 149 and’.

John Bercow: With this it will be convenient to discuss the following: Amendment No. 459, in clause 147, page 65, line 20, at end insert
‘, or the place where its register of members is kept available for inspection (if not at its registered office), or its principal place of business (if that is situated in the part of the United Kingdom in which the company is registered).’.
Amendment No. 367, in clause 147, page 65, line 33, at end add—
‘(7) An alternate director is to be treated as a director for the purposes of—
(a) sections 147 to 149 (register of directors),
(b) section 150 (register of directors’ residential addresses), and
(c) section 152 (duty to notify registrar of changes),
if he is so appointed for more than 1 month.’.
Government amendment No. 365
Clause 150 stand part.
Government amendment No. 366

Jonathan Djanogly: Amendment No. 270 is a technical amendment and is needed because the register of directors’ residential addresses required under clause 150 is not open for inspection as required by subsections (3) to (5). It is therefore designed to delete the reference to clause 150.
Amendment No. 459 came from the Law Society. Whereas a company’s registers of members and debenture holders may be kept at an address other than its registered office, its register of directors must be kept at its registered office. It has been pointed out that it is common for a private company to employ a single, combined register book containing all those particulars. If that is maintained by a company’s professional advisers, the company is obliged to have its registered office at their address rather than at its head office. We have previously recommended that the register of directors should be permitted to be kept at another address, provided that it is within the jurisdiction in which a company is registered and that notice of the address is given to the registrar of companies. Clause 212(2) is a reasonable model and we suggest that clause 147 be amended in line with it.
I note that in clause 153 it is made clear that the director notification provisions apply to shadow directors. Unless I have missed the provisions, I cannot see that the Bill makes specific reference to alternate directors in that regard. That deserves inclusion, if only to clear up confusion. The current state of the law is that when a person appoints someone as their alternate to pitch up at a board meeting under a company’s articles, he is technically required to file form 288 notifying Companies House of that fact. That can be more trouble than it is worth, especially as many people are appointed as alternates for only one board meeting or on an ad hoc basis. Each time the alternate is appointed, a form is supposed to be sent to Companies House, and after each board meeting a further form should be sent to notify Companies House of the termination of the alternate status.
In practice, those provisions are so unworkable that they are practised more often in the breach than in the observance. To clarify the matter we propose amendment No. 367, which states that if an appointment as alternate is for less than one month, no forms have to be filed. That would tie in with what is meant to be a deregulatory Bill. Whether or not notification is to be made of the appointment of an alternate, will the Minister advise me whether it needs to be written into the register of directors?
On clause 150 stand part, the question how best to protect the home addresses of directors has been an important issue—we previously discussed the personal details of shareholders—not least for directors who have been targeted for abuse by economic terrorists. Although the Opposition believe in robust scrutiny in corporate governance and value transparency, we are particularly concerned that a suitable balance be struck and that directors in charge of companies engaged in potentially controversial but lawful activities are protected, as is their right and our duty. I have been in touch with Lord Sainsbury on the matter for a number of years.
Out of necessity, the approach has evolved over the past few years. Following the last change in regulations, it is possible for directors to approach the DTI to request that they can use a service address. For everyone else, the home address is still to be used. However, the approach in the Bill has been changed so that directors will have the presumption of using their service address, provided that they give details of their home address for a second, private register.
The Conservative Opposition generally support this approach as a sensible way forward. However, it is fair to note that a limited number of concerns have been raised, mainly by lending bodies that are concerned for the implications relating to abuse by fraudulent people. Indeed, my noble Friend Lord Hodgson raised those very points in some detail in Grand Committee. We have received a note from the Finance and Leasing Association, and it is important to take a balanced approach and to put its views on the record:
“The most controversial aspects of the reforms from an FLA perspective are clauses 217-225 around Confidentiality of Directors’ Home Addresses. Our position here has differed significantly to the one set out by opposition parties”—
I am being very fair here—
“calling for a right for directors to have their home address kept confidential from the public record, and for a service address to appear on the public record instead.
Such a proposal would have significant consequences for the corporate lending and financing sectors, by limiting a lender’s ability to verify directors’ details against the public record.
The details of this are set out below...We noted concerns raised in the Official Report on proceedings during Committee Stage of the Bill about the possibility of disclosure of personal details held by the registrar to ‘bogus’ CRAs.
Like the Minister, we appreciate these concerns, but would like to take this opportunity to provide some contextual information that we hope will acknowledge and explain further the restrictions and safeguards that surround the Bill’s proposal for access to director information and the purposes for which this information is used by lenders.
Following a number of high profile cases, procedures were put in place for directors within high risk businesses and industries to apply to the Secretary of State to exclude their home addresses from the public register.
The Bill proposes a less onerous regime where any director can choose to give a service address, in addition to their personal home address. The service address will appear on the public register and a separate restricted register of protected addresses will be created.
Under the terms of the Bill as drafted, clause 220(3) allows for the disclosure of the protected register to CRAs. Further, clause 220(3) will enable the Secretary of State to make supplementary regulations to specify how data may be disclosed and used. The incorporation of these provisions followed discussions between industry stakeholders and DTI.
We understand that disclosure will be facilitated in a similar way to that adopted under section 114 of the Representation of the People Act (England and Wales) (Amendment) Regulations 2001 which provides for the sale of the electoral register to CRAs licensed under the Consumer Credit Act 1974 and registered with the Office of the Information Commissioner under the Data Protection Act 1998 as a credit reference agency.
This statutory scheme followed the recommendations of the Howarth Report”.
No relation to the hon. Member for Cambridge (David Howarth), I am sure.

David Howarth: Possibly.

Jonathan Djanogly: Possibly. That sentence continues by referring to
“intervention from the Office of the Information Commissioner. Both a full and edited electoral register were established. The full register was created from the annual canvass and is updated monthly on the basis of a rolling register. The edited register is made up of the records of those individuals who have not opted out of their data being used for any purpose.
Restrictions on the supply and use of the full electoral register resulted in only credit reference agencies engaged in the business of providing credit reference services being authorised to purchase the full register. In turn use of that register was restricted to:
Vetting applications for credit or applications that can result in the giving of credit or the giving of any guarantee, indemnity or assurance in relation to the giving of credit:
Meeting any obligations contained in the Money Laundering Regulations 1993...or any rules made pursuant to section 146 of the Financial Services and Markets Act 2000(c); and Statistical analysis of credit risk assessment in a case where no person whose details are included in the full register is referred to by name or necessary implication.
There are three major CRAs providing consumer information and five major CRAs providing commercial information to lenders and, in the area of sole traders and small and medium sized enterprises, there is considerable overlap between consumer and commercial activity.
CRAs provide information to lenders about businesses and those responsible for them. The information that they provide is a combination of public and privately shared data. Traditionally, this information has been provided to enable lenders to make decisions about advancing credit, to confirm identity for the prevention of fraud and money laundering, fraud prevention and investigation and for debtor tracing.
One important source of the information used is the directors’ data from Companies House. This can be combined with other information to enable lenders considering doing business with an organisation to check the individuals responsible for its running. A key element of this check is access to the home addresses of directors to verify and cross-check the identity of an individual across different databases.
We are concerned that the removal of the provision to permit the disclosure of the protected register to CRAs is likely to have significant and un-intended consequences for lenders.
Unscrupulous and disqualified directors may be encouraged to abuse the restricted register to avoid financial responsibilities, commit fraud, and obtain access to goods and services that would normally not be granted and to create fictitious identities. In turn lenders and other commercial organisations will face heightened risk and will become reluctant to do business with companies or individuals with whom they are unfamiliar unless further checks can be undertaken. New start-ups and particularly small and medium enterprises (SMEs) to whom our members provide finance are likely to find access to credit restricted as a result, all of which will serve to restrict growth and competition. Failed and disqualified directors will be able to conceal and disregard existing liabilities and bad debt and resume trading to the detriment of other businesses and the finance sector.
In order to mitigate these consequences it is important that the new public register of directors’ addresses specifies whether the disclosed address is a director’s home or service address. The protected register of directors’ home addresses must continue to be made available, in full, to certain authorised organisations for certain specific and limited purposes on condition that they use the information in specified ways for particular purposes only. This will safeguard lenders’ access to the information they need when assessing whether to advance a loan and in helping applicant identification.
CRAs have ensured that robust systems exist to manage access to the data contained within the electoral register and ensure that it is only supplied and used in accordance with the regulations. The recently published Electoral Administration Act 2005 empowers individuals deemed to be at risk to apply for anonymous registration in order to prevent their personal information from being published on the public register.”
I shall return to that point.
The FLA continues:
“The Department for Constitutional Affairs has also consulted with CRAs to ensure that access to personal data is maintained in a way that safeguards the identity of the individual while promoting financial inclusion.
We therefore strongly believe that the provisions of the Bill as drafted provide a practical and sensible set of arrangements providing for the continued functioning of the market whilst also putting in place the necessary safeguards to prevent abuse.”
That is a well-considered letter and it deserves to be mentioned. The Government will get about half way to providing what the FLA wants, but will the Minister discuss its concerns generally? It would be good to have that on the record.
Whether the provisions will work is yet to be seen, although we think that they will help. However, various issues need to be addressed now to tighten up their effectiveness. One is the need to enable directors to remove prior notifications of their home address; otherwise, the proposals will be useless if a director moves home. In the Lords, the Government resisted our proposal on that on the basis that the costs were too great. I found out through tabling a written question that it costs about £40 a go.
Ministers also said that as people can access details on the internet in any event, we should not bother to deal with the issue now. We disagreed with that position and were pleased that the Government seemed to have changed their mind in the final stages of consideration in the Lords.
This is part of a letter sent to me by Lord Sainsbury, who wrote:
“As regards historic information, the Bill—as amended—provides power for regulations to specify circumstances under which addresses can be removed from the public record held by Companies House. We intend to consult over draft regulations later this year so that they can be brought into force at the same time as the provisions providing protection for all directors’ home addresses.”
That is all well and good, but we do not understand why it cannot be done now in the Bill. We agree that if there is a cost, it should be borne by the director concerned. Furthermore, we will later move amendments Nos. 258 and 279 to clause 225(2)(b). That clause interacts with clause 741, which aims to ensure that when it is considered appropriate for old Companies House records to be removed, the registrar must do so.
There is a further issue of wider access to directors’ home addresses via the internet, which was discussed in the Lords. Gone are the days when we just threw up our hands and said, “That’s on the web, so there’s nothing to be done about it.” It is clear that the vast majority of directors’ addresses on the web are accessed via the electoral register, and we must deal with that.
In a letter of 9 May to Lord Sainsbury, I said:
“I am aware that Clause 10 of the Electoral Administration Bill, currently going through Parliament”—
that is what the FLA picked up on—
“would allow for an elector to apply to be registered anonymously. Please could you confirm that this provision could be used by individuals to ask town halls to remove their details from the public register.
Has your department assessed how useful these provisions would be to deal with the problems set out in this letter, e.g. as regards the level of proof of violence that would need to be given to the council?”
Lord Sainsbury, replying on 8 June, said:
“You asked about directors’ addresses on the electoral register. Anonymity is to be granted to those whose safety would be at risk if their name or address were to appear in the electoral register. The Department for Constitutional Affairs advises that decisions have not yet been taken on the evidence that will be required for a person to be granted anonymous registration, but the key will be in meeting the ‘safety test’ as set out in clause 10 of the Electoral Administration Bill. This test is satisfied if the safety of the applicant for an anonymous entry or that of another person of the same household would be at risk if the register contains the name of the applicant or his qualifying address.”
I am not totally convinced that the Government have yet given the issue the attention required or that they have considered closely enough the provisions of the Electoral Administration Bill in terms of protecting company directors in the context of this Bill.
When do the Government expect decisions to be taken on the evidence that will be required for a person to be granted anonymous registration and what will the threshold be? The Minister might have to come back to me on that matter.
The issue is a major concern for many embattled company directors. It is a serious issue for the stability of British business and the welfare of many directors and their families. I hope that the Government listen to their great need and come back to us on the matter.
I acknowledge the efforts of Lord Sainsbury, one of the few members of the Government who has consistently been brave enough to stand up for directors and shareholders who have been terrorised and who has paid attention in the past five years to the Opposition’s calls for protection for company directors and shareholders.
We recognise that the Bill has been greatly improved by various amendments made in the other place, but it is not quite there yet.

Margaret Hodge: That was a long speech on clause stand part. I want to return to the amendments. I thank the hon. Gentleman for picking up an incorrect cross-reference, and we are therefore happy to accept amendment No. 270.
On amendment No. 459, the hon. Gentleman makes a good case for companies having the option of keeping their registers of directors wherever their register of members is kept available for inspection, although he will agree that it must be in the same jurisdiction as the registered office and that it must be notified to the Registrar of Companies.
Any relaxation that the hon. Gentleman suggests should equally apply to matters such as plc registers of secretaries and to registers of authorised signatories for those companies required to keep them. The requirement should not be considered in isolation; there is also a right for members to inspect records of resolutions and meetings under clause 341. There is a right for members to inspect directors’ service contracts and qualifying third-party indemnity provision under clauses 213 and 220. There is a right for members and creditors to inspect instruments creating charges and a public right to inspect registers of charges under part XII of the 1985 Act, which is to be restated.
The possible places for the inspection of the various records and registers vary. We must minimise the likelihood of records being sent all over the place, possibly discouraging inspection by those who want to exercise that right.

Jonathan Djanogly: The Minister has just hit on the point. The procedure can be used to discourage inspections by having people go to different parts of the country to see different registers.

Margaret Hodge: The hon. Gentleman and the Law Society have made a sensible proposition. All that I would say to him is that we need some time and would like to table an amendment on Report that gives companies the option of keeping their register of directors either at the principal place of business or at the same place as their registers of members, but we want to include conditions that protect those who wish to inspect registers and other records and registers available. I hope on that basis that the hon. Gentleman will withdraw his amendment.
Amendment No. 367 appears to be deregulatory, relieving the company of the obligation to enter an alternate director’s particulars on the public record if his or her appointment is of minimal duration, but I am sure the hon. Gentleman would accept that there could be a serious problem with such an exemption. However long or short a time someone is appointed for, they have duties as a director for the period when they act as such. That is the current law, which the Bill retains. Under the amendment some appointments would become invisible. On that basis, it would be better not to accept it. I accept that bureaucracy is involved in complying with the 100 per cent. record, and if we can think of a better way of reducing the bureaucracy but maintaining the record we should adopt it. We will certainly consider that, but at present for completeness and consistency, we need to reject amendment No. 236.
I shall now speak to the Government amendments. On introduction in another place the Bill provided for a system whereby any director could apply to have his or her home address on the protected record. It was argued that that would leave many directors exposed, and we were persuaded that it would be better if all directors were to provide both a service address for the public record and their home address for the protected record. We tabled amendments based on a scheme suggested to us by the Association of the British Pharmaceutical Industry, which we will consider later when we reach chapter 8 of this part.
To keep things as simple as possible for companies and their directors, the Bill permits both that the service address be given as the company’s registered address, and that the home address be noted as being the same as the service address. That means that it would be possible for the record of a director’s residential address held at Companies House to be changed automatically if the company were to change its registered office, whether or not the director had in fact moved.
Furthermore, as the record of the residential address is not public, such errors would not come to light until an enforcement agency, for example, needed to use it. That would probably be a common problem, for as we all know, many companies on start-up have their registered homes at a director’s home but latergrow out of that arrangement. The Government amendments address that problem while still keeping things as simple as possible for both companies and directors. Amendment No. 365 provides that a director’s residential address may be stated to be the same as his or her service address only if the service address is not the company’s registered office.
Amendment No. 366 requires that with any notification of a change in the director’s service address there must also be either an accompanying notification of a change in the residential address or a statement that there is no change.

Jonathan Djanogly: Perhaps I missed it, but will the Minister explain what evil the amendment is trying to put right?

Margaret Hodge: The evil is that someone may need to track down directors through a home address, which would not be clear under the current provisions. In the example I gave of someone starting a company from their own home and then moving elsewhere, without the amendments there will be no way of tracking that change of address.
The hon. Gentleman made a lengthy contribution. We will return to some of those issues on clause 226. He talked about issues relating to clause 225. It all comes up in chapter 8 when we talk about directors’ residential addresses.

Jonathan Djanogly: If we get there.

Margaret Hodge: We will see how we do; it is up to the Opposition. I will study the hon. Gentleman’s contribution. If any issues arise on which it is necessary to write to him, I will do so.
Clause 150 was introduced on Report in the Lords as part of package of amendments to provide protection for all directors’ home addresses. Clause 223 provides that the information on those registers is protected. Clause 224 provides that, except with the consent of the director concerned, a company may use a director’s home address only in order to communicate with him or her. It also provides that it may disclose those addresses only under a court order or in compliance with a requirement to notify the registrar of companies. Clause 150 is therefore an essential part of that rather bigger package for protecting directors’ home addresses.
I am grateful to the hon. Gentleman for his acknowledgment—it was not apparent in our earlier discussion of privacy and the difficulties that individuals face—of the role played by my colleague Lord Sainsbury. He has done an enormously difficult job of taking forward many of these provisions incredibly well and bravely.

Jonathan Djanogly: We have made some progress this afternoon. Amendment No. 270 is to be accepted. I think that the Minister took the point on amendment No. 459 that there should be the ability to check registers in the same place. If that is not the case, there could be the possible evil of companies splitting up their registers to make inspection difficult and an obstacle rather than helping people. I appreciate that the Minister will respond to that amendment on Report.
The Minister was not so sympathetic towards amendment No. 367. Put simply, if I am a director and I cannot make a board meeting and I want to send my alternate, I send a one-line letter to the company saying “I appoint X as my alternate.” X goes along to the board meeting as my alternate and that appointment could then be finished. I could make the appointment for a longer period.

Margaret Hodge: If the hon. Gentleman were unable to make a board meeting and somebody went in his place to make the argument that he would have made, that person does not necessarily have to be an alternate to be able to contribute and speak in the consideration of a particular issue at a directors’ meeting.

Jonathan Djanogly: Perhaps the Minister could explain in which capacity such a person would go.

Margaret Hodge: They would go as a member, presumably. I do not know whether they would be a particular office holder. People talk at directors’ meetings and participate in the deliberations without necessarily being a director. The hon. Gentleman might have done this himself. A solicitor might well take part in a directors’ meeting, giving advice to the directors.

Jonathan Djanogly: The Minister is missing my point. I am not talking about a confrontational situation where solicitors are needed. I am simply saying that articles will provide for alternates. If I am a director and I cannot make a meeting, I might want to send my alternate.

Margaret Hodge: I am not talking about situations of conflict. Somebody who is not a director, viz. a solicitor, might give perfectly consensual advice on a decision discussed at a directors’ meeting.

Jonathan Djanogly: I see where the Minister is coming from, but I am making a different point. I am talking not about someone being invited to a board meeting to give advice but about someone acting as a director’s alternate and therefore having that director’s vote and going to the meeting in his place.

Margaret Hodge: The point that I was making was that if a director is ill for a meeting—that was where we started this exchange—and is therefore unable to present a report, that report could be given as advice from a finance director, solicitor or whatever without that person necessarily having a vote. I am told that many companies’ articles permit their directors to appoint somebody in their stead. There may be restrictions and conditions, but they do not affect the basic position that in law anyone occupying the position of a director is a director, whatever their title, howsoever they were appointed and even if they were not. That person is a de facto director.

Jonathan Djanogly: Yes, articles normally provide for a director to appoint someone in their stead—an alternate director. As the law stands, a form 228 must technically be filed if an alternate is appointed even for a single board meeting. That is hugely inconvenient and, as far as I can see, unnecessary. I still think that that is a relevant point. Is the Minister saying that under the new provisions the equivalent of a form 288 will not have to be filed in any event?

Margaret Hodge: No, I was saying that we ought to consider whether we can simplify the notification procedures in any way, taking the hon. Gentleman’s point that they are bureaucratic. I have just been told that the first company law directive requires that all directors be notified, which constrains our ability to be flexible in the way that the hon. Gentleman wishes.

Jonathan Djanogly: I assume that “all directors” includes alternate directors, although the Minister did not say so. Assuming that it does, there might be a problem. I appreciate her taking the point and saying that she will look at the bureaucracy. I am making a point of bureaucracy rather than one of grand principle.
Government amendment No. 365 seems sensible and I have made the points that I wanted to make on clause 150 stand part. I hope that the Government do not see this debate as the end of the game or believe that consideration of the provisions stops here. There is more to do to build on the body of support that is being built up.

Amendment agreed to.

Clause 147, as amended, ordered to stand part of the Bill.

Clauses 148 and 149 ordered to stand part of the Bill.

Clause 150

Register of directors’ residential addresses

Amendment made: No. 365, in clause 150, page 67, line 3, leave out subsection (3) and insert—
‘(3) If a director’s usual residential address is the same as his service address (as stated in the company’s register of directors), the register of directors’ residential addresses need only contain an entry to that effect.
This does not apply if his service address is stated to be “The company’s registered office”.’.—[Margaret Hodge.]

Clause 150, as amended, ordered to stand part of the Bill.

Clause 151 ordered to stand part of the Bill.

Clause 152

Duty to notify registrar of changes

Amendment made: No. 366, in clause 152, page 67, line 37, leave out subsection (3) and insert—
‘(3) Where—
(a) a company gives notice of a change of a director’s service address as stated in the company’s register of directors, and
(b) the notice is not accompanied by notice of any resulting change in the particulars contained in the company’s register of directors’ residential addresses,
the notice must be accompanied by a statement that no such change is required.’.—[Margaret Hodge.]

Clause 152, as amended, ordered to stand part of the Bill.

Clause 153

Application of provisions to shadow directors

Jonathan Djanogly: I beg to move amendment No. 157, in clause 153, page 68, leave out line 7.
Concerns have been raised about the level of knowledge that might pertain to a shadow director. For instance, if I control 100 per cent. of a company and appoint some friends to be directors when in all but name I am calling the shots and running the company, it is clear that I am a shadow director. Clearly, it is also right that I am bound by clauses 147 to 149 and the registration provisions in clause 150.
In reality, however, whether an alleged shadow director controls the company is often confusing. For instance, it might depend on the extent of the influence exerted. A bank, through its financial covenants, might call the shots to the extent that it comes to be seen as a shadow director. In such a situation it might be that the shadow director honestly has no idea that he, she or it is a shadow director. The question then is whether such a person should have the same liability as a normal director who fails to register particulars.
In addition, recent case law seems to state that even when it is decided that someone is a shadow director, it does not necessarily follow that they should have the same duties as a normal director. That is an important new point that has come out of a recent case. I would like to go into that in a little more detail. I am afraid that it is not the most straightforward of topics.
A de facto director is a person who acts as a director without having been appointed validly, or at all. They owe director’s duties to the company in relation to which they perform those functions. That is the old common law position. A shadow director is a person in accordance with whose directions or instructions the directors of a company are accustomed to act. Professional advisers acting in that capacity are generally excluded from the definition.
The Court of Appeal made the following statements about the statutory definition of a shadow director: that the definition should not be strictly construed; that the purpose of the legislation was to identify those, other than professional advisers, with real influence in the company's corporate affairs, but this influence did not have to be over the whole field of its corporate activities; that whether a communication was to be classified as a “direction or instruction” had to be objectively ascertained by the court in the light of all the evidence; that non-professional advice might come within the statutory definition; that a person could still be a shadow director even though the board had not adopted a subservient role to him or had not surrendered its discretion; and that shadow directors are subject to specific statutory obligations and duties—including those imposed under the Companies Act 1985 and the Insolvency Act 1986.
The recent development came in the Ultraframe case of 2005. U Ltd—the claimant—and B Group, of which F was the majority shareholder, were business competitors. A dispute arose between them concerning the ownership of businesses in the field of conservatory roof design and manufacture. The dispute focused on the operations and transactions of two companies—N Ltd and S Ltd—which had been set up some years ago and were now insolvent and controlled by U Ltd. F had been appointed a director of S Ltd in October 1999, but was never appointed director of N Ltd. U Ltd contended that F was a shadow or de facto director of both S Ltd and M Ltd from about October 1998 on the basis that F, among things, attended board meetings of both companies; told the directors ofS Ltd that he wanted the location of the company’s business to be moved; was the sole signatory to S Ltd’s bank account from November 1998; stated in a letter to his solicitors dated February 1999 that he was “now running the company”; granted leases to S Ltd in March 1999 on which there were no real arm’s length negotiations over rent or other terms; made a decision to change S Ltd’s supplier of components; became company secretary of S Ltd; and took debentures over N Ltd and S Ltd in anticipation of supplies of materials and financial support.
In addition to considering F’s status within N Ltd and S Ltd, the court also considered, among many other things that hon. Members will be pleased to know I will not go into, whether as a shadow director F owed fiduciary duties to S Ltd and N Ltd. It held that F had become a de facto director of the companies from January 1999, when he had at least an equal voice to that of their de jure directors in important business decisions and was part of the corporate structure of governance. F had not become a shadow director of either company before he became a de facto director, because the board was not “accustomed to act” on his instructions or directions before that time.
The court also made the following points on shadow directors: that in most cases, it is unlikely on the facts that a person will be simultaneously a shadow director and a de facto director, although he may be both in succession; that in determining whether someone has become a shadow director it is necessary to look at all the various matters cumulatively; that a person at whose direction a governing majority of a board is accustomed to act is capable of being a shadow director; and that unless and until a board does something in conformity with a putative shadow director’s directions or instructions, the question of shadow directorship does not arise. It pointed out that the mere giving of instructions does not make someone a shadow director, and that it is only when instructions are translated into action by the board that that question can arise.

Mike O'Brien: The hon. Gentleman is obviously aware of Mr. Justice Lewison’s views as he has just been setting them out. He must also be aware of Mr. Justice Toulson’s views in Yukong Line of Korea Ltd. v. Rendsburg Corporation Investments of Liberia, which seem to conflict with those views. Is he suggesting that it is the job of the Minister to resolve that conflict? He is aware thatMr. Justice Toulson and Mr. Justice Lewison appear to have different views.
In the Ultraframe case it was held that the mere fact that a person falls within the statutory definition of a shadow director is not enough to impose on him the same fiduciary duties as are owed by de jure directors. However, Mr. Justice Toulson proceeded on the basis that a shadow director could be in breach of fiduciary duties as a director. Is he suggesting that the Minister should resolve, here and now, the difference between those views on the obligations of shadow directors?

Jonathan Djanogly: I am saying that the Bill should take on board the latest case that has been held.
My final point on the Ultraframe case, and in some ways the most important, is that the court held that the mere fact that a person falls within the statutory definition of shadow director is not enough to impose on him the same fiduciary duties to a company as are owed by a de jure or de facto director. It was decided that the indirect influence exerted by a shadow director who does not deal directly with, or claim the right to deal directly with, a company’s assets will not usually be enough to impose fiduciary duties on him, although he will be subject to the statutory duties and disabilities that the Companies Act 1985 creates. The case is stronger where a shadow director has been acting throughout in furtherance of his own, rather than the company’s interests. However, in a particular case, the activities of a shadow director might go beyondthe mere exertion of indirect influence.
On a probing basis, amendment No. 157 suggests that shadow directors should not therefore have to register their details. I will be interested to hear the Minister’s view, but as I said to the Solicitor-General we feel that the clause does not have the adaptability required following the Ultraframe case.

David Howarth: I have nothing much to add to the learned debate between the hon. Member for Huntingdon and the Solicitor-General except the more important point about what the law in this case is about. Does the law wish to discourage people from acting as shadow directors or is it simply trying to deal with the fact that sometimes people are shadow directors? That is the more fundamental conflict of opinion than the difference of opinion of the judges in those two cases.
It has always seemed to me that the status of shadow director is an unfortunate one which the law should try to discourage in the first place. If someone acts in a such a way that other people are accustomed to do what they say, an important part of the transparency that is part of company law is lost. Difficulties arise not just in regulation, but in terms of investors, creditors and people who deal with the company knowing who is running the company and what their interests and intentions are. My view—I recognise that there are others—has always been that the purpose of the law is to set up a penalty to discourage the status of shadow director coming into being in the first place. I oppose the amendment because it would make life easier for shadow directors.

Margaret Hodge: The Lib Dems want to knock them out, the Tories want to conceal them and we are finding a third way through it all. I listened with interest as a non-lawyer to the hon. Member for Huntingdon. I would simply draw his attention to our definition of shadow director in clause 234:
“a person in accordance with whose directions or instructions the directors of the company are accustomed to act.”
The complex case he took us through—I am told that the judgment runs to 750 pages and I cannot claim to have read it—does not undermine that definition.

Jonathan Djanogly: The Minister will therefore be grateful for my very brief synopsis.

Margaret Hodge: When I read Hansard I will reflect on that.
It is our view that the case in no way undermines that. There is nothing intrinsically nefarious about shadow directors. What would be suspicious is if their identity were concealed. Therefore, it is essential that the identities of those who control companies in the terms laid out in the Bill should have their record in the public domain. On that basis, I should be grateful if the hon. Member withdrew his amendment and accepted our proposition. The only thing that I have been told is that our wording is not brilliant so we will bring forward an amendment on Report to toughen it up.

Jonathan Djanogly: Is the Minister prepared to say in what way her wording is not quite right?

Margaret Hodge: Apparently the wording does not quite meet the intention, which is that a shadow director be treated as a director for the purposes of the company’s requirement to keep a register of its directors and a register of its directors’ residential addresses. The particulars of a director must be entered in a company’s register of directors and the power to make regulations amending these particulars is a requirement that the company notify the registrar of companies of any change in its directors’ particulars. I am no drafter, but I am told that the drafting does not make that abundantly clear. When looking again at the clause when the amendment was tabled, our lawyers felt that it needed slight redrafting to meet the intent. There is nothing further than that.

Jonathan Djanogly: If nothing else, I am pleased to have enabled the Minister and her Department to look again at the clause. If a redraft is to come out of that I am sure it will be of benefit to the Bill as a whole. By the way, if the Minister wants full citations in future, I would be delighted to oblige.
The hon. Member for Cambridge said that the law should discourage shadow directors. Shadow directors exist. We might not want them to, but they do. I gave examples of some earlier. Let us consider a bank that has no intention of being a shadow director, but which through its covenants can force a company to go down certain routes. At some point, a court will decide that the level of control is such that the bank has become a shadow director. In fact, a bank will do everything it can to avoid becoming a shadow director because it will not want the obligations. Banks are terrified of that situation arising; a lot of lawyers’ time has been spent on ensuring that they are not shadow directors.
The issue is not about what we want to happen; it is about what happens as a result of how people act. Our amendment was simply trying to reflect that. I shall look carefully at the Minister’s comments on what will happen at a later stage; I hope that they address my remarks on drafting. However, on that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 153 ordered to stand part of the Bill.

Clause 154 ordered to stand part of the Bill.

Clause 155

Director’s right to protest removal

Jonathan Djanogly: I beg to move amendment No. 158, in clause 155, page 69, line 7, at end insert
‘or require that the meeting be adjourned to a date not earlier than 14 days after his representations have been circulated.’.
The amendment was tabled by Lord Freeman in Grand Committee in the Lords, and I have to say that it deserves further consideration. Company law changes because the requirements of companies’ shareholders and other stakeholders change over time; it is not a static process. The concept of shareholder democracy is one advance that has had the full support of those on the Opposition Benches. It means strengthening the power of institutional shareholder activism.
Those provisions were adopted many years ago, but it is important to note that in the United States shareholders still cannot vote on directors, let alone on a simple majority. So, the provisions are still far-thinking, and certainly were when they were put in place. In practice, however, those statutory provisions have been little used, although their presence should not be underestimated, particularly as they provide for the ability gently to persuade directors to go at the appropriate time, with the nuclear option of a resolution available if required—if the director refused to go.
Shareholder activism, however, is becoming more attractive to institutional shareholders as generally it gets plaudits from the media and smaller investors for delivering value to shareholders. One institutional investor employee whom I spoke to recently explained that investors who take a proactive approach invariably receive higher returns than those who do not. I do not have any statistical analysis with which to back that up, but it seems to point towards increased shareholder activism. We welcome that.
If, however, powerful shareholders are to be given the power of the order of the boot—a good thing—it is important that, at the same time, the director concerned has the right to defend himself. As Lord Freeman pointed out, in practice, the director might not have access to the share register and no means by which to explain his position to other shareholders.
In effect, there could be a rather dirty power fight in the company, and the Bill provides that if the director’s representations are not sent out to shareholders, he has the right to have them read out at a meeting. But as anyone who has operated in this area knows, very few shareholders normally turn up to general meetings, preferring normally to vote by proxy—by post—before the meeting. That means that the aggrieved director would be reading out his representations to a meeting where most of the people had already voted, if there were many people in the room at all.
That seems unfair, and the amendment attempts to right the wrong by stating that in such circumstances the director should have the right to prevent a vote from being taken at a meeting and to have the meeting adjourned until such time as his submissions have been circulated to the membership, which would not be earlier than 14 days after circulation.
Lord McKenzie said in the Lords that that was not relevant as that provision was not much used in practice. That response is inadequate. I have said why I think that the previous practice is not an indicator of what is likely to happen. Lord McKenzie also said that the amendment could be used as a delaying tactic. I am not sure I understand that, and I would be grateful if the Minister explained what he was getting at.
We consider the balance in terms of rights to get rid of directors and directors’ rights to defend themselves not quite struck. The amendment would address the imbalance.

David Howarth: I have some sympathy with the amendment, but there is a slight difficulty with it on which I would appreciate comment from the hon. Gentleman—the power it would grant to the agreed director who asked for an adjournment would come in not only when the company had been in default in failing to circulate the director’s case, but when the documentation had merely arrived too late.
My slight worry is that such lateness in arrival might, in certain circumstances, be the fault of that director. For example, that person might fail, perhaps deliberately, to put enough stamps on an envelope to ensure that it arrived too late. That is an example of a delaying tactic that might be used.
I fully agree with the idea of allowing an adjournment when it is the company’s fault that the information has not been circulated, but not in other circumstances. While I am on clause 155, may I make a small clause stand part point, which has been irritating me ever since I read the clause? The clause is entitled, “Director’s right to protest removal”. That is not English; it is American. It should read, “Director’s right to protest against removal”. At some point, can that be changed?

John Bercow: I entreat the Minister not to be drawn into a clause stand part debate. I am sure that she will not be, notwithstanding the temptations offered by the hon. Member for Cambridge.

Margaret Hodge: I have listened to the hon. Member for Huntingdon and I have read the Lords debate. I have to say that I am not persuaded by his arguments in this instance. We have just heard from the hon. Member for Cambridge that lawyers are the best people at thinking up delaying tactics. Whether it is putting second-class stamps on letters or putting No. 11 Downing street instead of No. 10—[Interruption.] Or the other way round. One can think of endless delaying tactics that might be employed by people wishing so to do.
As Lord McKenzie said in the House of Lords, there are safeguards. This is a power that, as the hon. Member for Huntingdon has accepted, by its very existence acts an incentive for such issues to be settled outside a meeting of shareholders. The director has the right to be heard orally or to have his or her representations read out at the meeting, if he or she cannot be there. The clause should stand as it is, although as an aside to the hon. Member for Cambridge, as I hate Americanisms too, I shall look into the matter.

Jonathan Djanogly: The hon. Member for Cambridge makes a fair point about documents arriving too late. If the delay was the fault of the director or if there was evasive action on their part, we would contemplate changing the drafting of the amendment to accommodate that, so that it would not apply in such circumstances.

Margaret Hodge: The hon. Gentleman must recognise that once that point is conceded, one ends up with such a complicated procedure that it is a nightmare to administer, with all sorts of people challenging aspects of it in litigation.

Jonathan Djanogly: That is not the case at all. The procedure could be kept pretty straightforward. The Minister does not appreciate the reality of the situation, in that there will normally be a huge disparity of firepower between the director and the institutional investors. The delaying tactics that the director is likely to use are probably less than those that an aggressive shareholder could use. The firepower of the aggressive hedge fund that takes a stake in the company but then wants to sack the whole board and put its own people in place will be a lot greater, in terms of spending power and having PR people on board, than that of the average director. The purpose of the amendment is to address that disparity.

Margaret Hodge: I accept the picture that the hon. Gentleman paints of the situation that could arise, but I am not sure that his mechanism would in any way alter it. Nothing that he has suggested would militate against a majority of shareholders passing a resolution to sack a director, which would happen anyway.

Jonathan Djanogly: I am certainly not trying to stop the enshrined right of members to get rid of directors—quite the opposite, as I thoroughly approve of it. At the same time, however, the director who is under attack must have the right to defend him or herself.

James Brokenshire: Does my hon. Friend agree that the question is one of fairness? In the issue of default, if a company has either deliberately or negligently failed to send out a statement, there should be at least some protection for the director in the circumstances that he has described, given that shareholders might not turn up to a general meeting, because the facts will have been presented to them in a particular way, which could be corrected by a statement. That goes to the fundamental issue of fairness, which he is trying to address.

Jonathan Djanogly: Very much so. By the time the meeting happens, everything is all over anyway, because in practice the majority of the votes will have been cast by proxy. For those reasons, I am minded to press the amendment to a Division.

Question put, That the amendment be made:—

The Committee divided: Ayes 6, Noes 12.

Question accordingly negatived.

Clause 155 ordered to stand part of the Bill.

Clause 156

Scope and nature of general duties

Jonathan Djanogly: I beg to move amendment No. 160, in clause 156, page 69, leave out lines 28 and 29.

John Bercow: With this it will be convenient to discuss amendment No. 164, in clause 156, page 69, line 37, leave out subsection (5).

Jonathan Djanogly: We move on to part 10, chapter 2, “General duties of directors”. These amendments are more technical in nature than the next group under the clause, which will enable more of a stand part debate. They have been suggested by the Law Society. Lord Freeman proposed an amendment to remove from subsection (2) the statement that clauses 161 and 162 should apply to a former director in the same way as to a current director. Lord Goldsmith responded that the clause was valuable as it would inform directors of their liability and allow the courts to adapt the provisions to the fact that former directors are no longer serving in that role. With respect to the Attorney-General, I cannot see how that will make things clearer or how it will not lead to a lot of court cases requiring interpretation. The deletion of the last two lines of subsection (2), as proposed by amendment No. 160, would cut out repetition and reduce the room for conflicting interpretations.
On amendment No. 164, I note a briefing included in the June issue of PLC Magazine, which states:
“Clauses 156 to 163 codify directors’ duties by introducing a statutory statement of duties that will replace existing common law and equitable rules. The codified duties will apply to all the directors of a company, including shadow directors. However, as shadow directors are not in the same position as actual directors, the application of the duties to shadow directors apply only to the extent that the corresponding common-law rules or equitable principles so apply.”
In their explanatory notes, the Government state that clause 156(5) means that
“where a common law rule or equitable principle currently applies to a shadow director, the statutory duty replacing that common law rule or equitable principle will apply to the shadow director (in place of that rule or principle). Where the rule or principle does not apply to a shadow director, the statutory duty replacing that rule will not apply either.”
Hon. Members can see from that short explanation that this is a complicated matter. The Attorney-General accepted in the other place that the law on the duties of shadow directors is uncertain and should be allowed to develop. How he jumped from saying that, which to my mind acknowledges that the matter is best left to common law, to saying that there should be codification, I still do not understand. The traditional view, which the Law Society believes correct, is that duties do not apply to shadow directors. Subsection (5) crystallises the uncertainty, and any prospect of the law being developed by the courts could therefore be ruined. Perhaps the Solicitor-General could elaborate further on the Government’s position.

Quentin Davies: I wish to follow up what my hon. Friend has said, as I too was somewhat perplexed by the clause, which implies that the duties of directors are those that are already established in common law and therefore in the jurisprudence. That seems to contradict the purpose of clause 158, to which we will come shortly, which defines in statute the principles on which the duties of directors are based and to which directors must have regard in the performance of their duties and responsibilities.
As I explained on Second Reading, there is unfortunately a difference between my hon. Friends and me on this subject. I believe that the Bill is a definite improvement and reform of the law. We have taken the word “reform” out of its title today, and rightly so. However, we want to feel that we are reforming and improving the law, and I believe that it is definitely reformed and improved by removing the area of legal doubt that exists at present and replacing the vague reliance on common law with statutory rules for directors.
If that is the case, why does the Bill state in clause 156(5) that the rules of common law apply? I am particularly mystified by subsection (3), which states:
“The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director.”

John Bercow: Order. I am sorry to interrupt the hon. Gentleman, but I believe that he is directing his remarks to the next group of amendments, to which we will in due course come but on which he cannot expatiate now.

Quentin Davies: I am sure that you are right about that, Mr. Bercow. I may attempt to catch your eye later.

David Howarth: Amendment No. 164 raises an important point and shows how difficult it is to draft statutory clauses that are meant to facilitate the interaction between statute law and common law. I would like the Solicitor-General’s comment on one aspect of the clause. As I mentioned earlier, my view on the whole is that the law should not encourage the relationship of shadow director to a company, because of the problems that it causes with transparency and the extra difficulties for people who are dealing with the company.
The question that arises concerns the intention of subsection (5). Is it to freeze the law as it is now in respect of applying directors’ duties to shadow directors? On one reading, it is, as the present tense is used. The clause states that
“the corresponding common law rules or equitable principles so apply”,
which seems to imply that it is how the law works now rather than how it might develop in future. I do not know how it will develop in future. It might develop in a direction that I would wish, or in one that the hon. Member for Huntingdon might wish, but I would not like to exclude any development in either direction.

Mike O'Brien: I reassure the hon. Gentleman that the aim is to ensure that the law can continue to develop. There is some imprecision about the present law, particularly in the area of shadow directors. We touched on that in reference to a couple of cases. We are seeking to enable the common law and equitable principles to be included so that the courts can apply them and ensure that they are able to develop in future as circumstances change, and that the case law that has applied until now can continue to apply. We certainly are not setting anything in stone.
Amendment No. 160 applies to former directors and amendment No. 164 to shadow directors. I shall deal with former directors first. The amendment would remove a useful sentence that explains how the two general duties will apply to former directors. Essentially, those two general duties, as set out in subsections (2)(a) and (b), will apply to former directors as they do to current ones. Those duties are:
“to avoid conflicts of interest”
and
“not to accept benefits from a third party”.
As I said, those duties apply in the same way as they do to directors, but only in respect of the matters listed in subsection (2). So a former director remains under a duty to avoid conflicts of interest, but in relation only to the exploitation of any property, information or opportunity of which he became aware when he was a director.
The former director will be able to take advantage of all the exceptions set out in clause 161 so that the duty is not infringed if the matter has been authorised or
“if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest”.
Likewise, the duty not to accept benefits from third parties continues to apply to former directors
“as regards things done or omitted by him before he ceased to be a director.”
However, that duty does not continue to apply to former directors in respect of benefits conferred because the person was once a director of a company. That way, legitimate benefits, such as a pension payment, are not caught. Of course, former directors may be held liable for breaches of any of the general duties committed when they were directors.
We hope that those rules will enable us to preserve some of the flexibility that the courts currently have to take into account the fact that duties are applied to people who are no longer directors of a company. The courts need to preserve flexibility when they interpret and apply those duties and should not be constrained to apply the general duties to former directors in exactly the same way as to those currently serving as directors. There is therefore an element of adaptability in the way in which those various duties can apply.
A former director is in a different position. For example, he might not be attending board meetings and so will not be up to date or have access to the books and records of the company. The courts might wish to apply the duties in a way that acknowledges that a former director does not have the same powers as a director or the same access to information and knowledge about the affairs of the company, particularly the current and future affairs, which might have been planned and discussed at board meetings. So that part of the clause contains an element of adaptability. The words
“subject to any necessary adaptations”
ensure that the courts are able to look at the circumstances of each case.
I shall turn now to amendment No. 164, which deals with the general duties applied to shadow directors. The amendment deals with an area in which the law is less than clear, as I have indicated already. We have mentioned in passing the Ultraframe and Yukong Line cases. One or two cases were thought to support the view that some of the general duties apply to shadow directors, but a more recent case—the Ultraframe case—suggests that that might not be so, or that under certain circumstances a person might not be aware that they should be complying with the provisions when they act as a shadow director.
The recent case indicates that the fiduciary duties might not also apply to shadow directors. It is not yet clear whether that was always the case; sometimes the law says that things were always the case, even though they have changed. The duties or at least some of them may apply to some shadow directors, depending on the circumstances.
Accepting that the law is unclear on this subject, the Government have a choice. Do we say, “The common law rules and equitable principles apply to shadow directors, and that should be replaced by an entirely new set of statutory obligations.”? We have taken the view that, particularly in this case, we will allow the common law and equitable principles to develop, and the courts can consider particular circumstances. It is very rare in practice for such cases to come before the courts, and we are not going to jump in and try to impose a view.
Against that background, subsection (5) is not designed to resolve the uncertainty surrounding the application of the common law rules and equitable principles to shadow directors. In our view, it is right to leave this undeveloped area of law to the courts, at least until such time as a body of law becomes established, which may then be suitable for codification.
Subsection (5) is designed to allow the law in this area to develop. It does not set the current uncertainty in stone, as I said to the hon. Member for Cambridge. In determining whether the general duties should apply to shadow directors, the courts may take into account not only existing case law on the application of the common law rules and equitable principles, but any future cases in this area.
Subsection (5) is intended to be broadly neutral, but if it were absent from the Bill, as the amendment suggests, there would be greater uncertainties. To the extent that the common law rules and equitable principles apply to shadow directors, it would become unclear whether they were to continue to apply or whether the general duties were to apply in their place.
Although there is a lack of clarity at the moment, not including this subsection would produce greater uncertainty. Including it shows the direction in which Parliament wishes the courts to go: applying the developing common law rules and equitable principles as they do now into the future. I hope that, on that basis, the amendment will be withdrawn.

Jonathan Djanogly: On amendment No. 160, I hear what the Minister says. I still think that the wording in the Bill is otiose and that the phrase
“subject to any necessary adaptations”
might be confusing, but it is not necessarily damaging, so I will not take that amendment any further.
On amendment No. 164, the more I hear of this application of law for shadow directors, the more doubtful I become as to the provisions of the clause. The Solicitor-General says that the law continues to develop, but the fact remains that many people argue that these provisions are stopping it developing as it should, rather than being neutral, as he suggested.
We all agree that the law in this area will develop and I think that we all agree that none of us knows exactly how it will develop, so why not let it develop under the common law, as it is happily doing at the moment? That point was made by my hon. Friend the Member for Grantham and Stamford (Mr. Davies), who veered slightly into another debate, but I feel—apologies,Mr. Bercow—that his core point is relevant to this debate.

Quentin Davies: I do have a serious point on this issue and I wonder whether my hon. Friend can help me. I understand that he does not really approve of clause 158 and we will reach that debate in due time, but supposing that clause 158 is adopted by the House and becomes part of the law, does he not agree that if there are statutory duties, they should apply equally to shadow directors as to directors who are not shadow directors?
Two separate regimes would not make sense, as the purpose of the Bill is to ensure that shadow directors face the same obligations as real directors and that making oneself a shadow director rather than getting oneself elected to the board if one controls a company is not a way to avoid those obligations.

Jonathan Djanogly: My hon. Friend makes an interesting point, which we discussed in the previous debate. The issue is the extent to which shadow directors are similar to real directors. There seem to be different interpretations of that point, which put them into a different category from normal directors. However, he makes a fair point. His description of our position on clause 158 was not quite right, but I will save that for the debate on that clause. I have concerns about the amendment, which has not been fully thought through.

Mike O'Brien: If this offers further reassurance to the hon. Gentleman, we have been looking at this. Companies Acts have developed in such a way that where rules are to apply to shadow directors, it is stated that they shall so apply. If we removed that and allowed the common law to develop without any reference in the statute, it would be contrary to how things have been done in the past.
The courts might take judicial notice of that, and they may well conclude that there was therefore an intention that Parliament should not apply those rules to shadow directors. If we did not have this provision, which would be removed by amendment No. 164, we would risk creating greater uncertainty. The hon. Gentleman and I both intend much the same thing. We want to allow the common law and equitable principles to develop, but if we do not refer to it, the courts may well be put in a position of great uncertainty.

Jonathan Djanogly: The Solicitor-General is correct; we both want the common law to develop the principle. The question is whether tying it down in this way will hinder that. I have my doubts. However, he put his case eloquently and it deserves further thought from our side. We may well come back to this on Report. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Jonathan Djanogly: I beg to move amendment No. 161, in clause 156, page 69, line 30, leave out subsection (3).

John Bercow: With this it will be convenient to discuss the following amendments:
No. 162, in clause 156, page 69, line 31, leave out ‘apply’ and insert
‘applied prior to the entry into force of this Act’.
No. 159, in clause 156, page 69, line 31, leave out from ‘directors’ to end of line 32.
No. 163, in clause 156, page 69, line 33, leave out subsection (4).

Jonathan Djanogly: We move on to a different aspect of the clause. These amendments are probing, so this will be more like a stand part debate.
We now enter the grey area of directors’ duties. The more I look at these provisions in the round, and the more that everyone else looks at them, the murkier they seem. In Grand Committee in the Lords, Lord Freeman set out the Opposition’s general philosophy succinctly, and we shall be taking the same line. He said:
“There is total agreement on these Benches to the proposition that directors of a successful company—and, hence, successful for the shareholders—should take into account the long term. You cannot plan a successful company by looking at short-term gain and short-term popularity, be it on the stock market or in the eyes of members of the company. There is also total agreement that good directors and good boards should take into account the interests of employees, customers and the environment, and it goes without saying that conflicts of interest must be guarded against and prevented. So there is agreement on this side of the Committee on the general approach.
How those aspirations are framed in statute is extremely important. We are moving on from a system of self-regulation in a free capital market—which is absolutely vital—to one where the duties of directors are sought to be laid out in a very precise form. Noble Lords on this side of the Committee will argue that three important tests must be met and we are testing the language of the Bill against those three tests. They are not exclusive, but they are important. The first is: does the Bill increase the prospect of vexatious litigation? Secondly, do the provisions increase boardroom uncertainties to the extent that too much time is wasted and too much bureaucracy is involved in the interpretation of the law? Finally, do these provisions decrease the flow of talent to all companies, whether public or private, large or small?
These perfectly legitimate concerns have been presented to us—and, I am sure, to other noble Lords—by the Confederation of British Industry, the Institute of Directors, the Association of British Insurers, the Law Society, the Institute of Chartered Accountants in England and Wales and many others. We have to be careful. It is our duty to ensure that the language of the Bill—which, I hope, when amended, will become an Act—will establish a corporate law which is discharged by directors of companies in the most efficient and fair manner. We do not wish to jeopardise the great virtues of an efficient capital market, which rewards entrepreneurship and success and penalises failure.”—[Official Report, House of Lords, 6 February 2006;Vol. 678, c. GC237-38.]
That was very well put.
To start the ball rolling, I shall give the views on subsections (3) and (4) of Patrick Mitchell and Carl Powlson, of the City law firm Herbert Smith:
“These sections appear to us to be fundamentally inconsistent. On the one hand section 156(3) states that the general duties are to have effect ‘in place of’ the relevant common law rules and equitable principles. On the other hand, section 156(4) states that the new codified duties should be interpreted and applied having regard to the pre-existing common law rules and equitable principles. This, coupled with the fact that the codified duties are phrased using different terminology to the existing common law directors’ duties, means that there is uncertainty as to the extent to which the new duties replicate, replace, or apply in addition to the pre-existing common law directors’ duties, or whether they are to apply in conjunction with them. In reality therefore, it is perhaps difficult to see how the codified duties will be more accessible or comprehensible (indeed arguably they could prove to be more uncertain and more complex).”
In one way or another, we will be speaking about this matter for a very long time, but I think that that comment is a good start. It succinctly puts across one of the core problems with clause 156, and indeed with later clauses in this part. The duties are to be based on common law rules and equitable principles, which will be
“interpreted and applied in the same way”.
As for amendments Nos. 159, 161 and 162, the Law Society has recommended amending subsection (3), which it believes is confusing as it implies that common law rules and principles will apply even after the Bill comes into force, despite its then saying that the general duties in chapter 2 will replace those rules and principles.
A briefing note by the Solicitors’ Journal develops the point further by noting that the courts will still have to have regard to existing case law, which will inevitably have to be developed in the future. That clearly indicates that the duties in chapter 2 are not comprehensive and exhaustive, but are either a starting point or a staging post, depending on one’s point of view.
As for amendment No. 163, the Law Society has recommended omitting subsection (4) as not all the duties have a corresponding rule or principle, as shown, for example, in clauses 162 and 163. In some cases, the new statutory duty is clearly based on a particular rule or principle, yet the wording has been changed so that the duty is different, as shown, for example, in clauses 159 and 161. In such cases, it is hard to see how subsection (4) could be used.
The amendments are probing, as we want to enable the Government to explain their position. We still do not think this is the right way to go about things in relation to the clause. This has been constantly shifting and uneven ground before the Bill was published, when it was published and during consideration in the Lords. As the Minister will have seen from the vast majority of the many expert briefings produced following those debates in the other place, we have not yet reached the position we want on these proposals, and I look forward to hearing his views.

Quentin Davies: My hon. Friend went over some of the ground that I was going to cover. In fact, I was about to go over it when you rightly pointed out that I had mixed up two sets of amendments, Mr. Bercow. That is a terrible offence, and I am sorry about it. The mischief is a matter of apparent contradiction of text.
Subsection (3) speaks of the new rules, which we will come to in clause 158, as having
“effect in place of those rules”—
that is to say, the common law rules. However, subsection (4) refers to exactly the same general duties that are about to be enunciated in Bill, as against the existing common law, and says that in interpreting those general duties
“regard shall be had to the corresponding common law rules”.
By my reading, those two phrases are contradictory in the guidance they give to the public, the citizen, directors and, potentially, the courts. The phrase
“have effect in place of”
surely means that we are drawing a line and saying that the courts should ignore what has gone before—the common law and the jurisprudence—and start again, with clause 158. That is how I interpret those words. To have effect in place of something else means that the effect of the something else is abolished and we are starting from scratch, with what we are setting out. However, the sentence in subsection (4)—
“regard shall be had to the corresponding common law rules”—
means exactly the reverse. It means that, in interpreting the new rules, we can look back at the old ones.
In other words, under subsection (3) it would not be possible to pray in aid the previous jurisprudence when doubts might arise over the interpretation of the new general principles that we are about to enunciate. However, in blatant contradiction to that, the courts are told in subsection (4) that it is indeed possible to pray in aid the previous jurisprudence. That is just bad drafting. It might be that I am particularly stupid and that no other human being will ever be confused by that wording, although I have some doubts about that, as others could fall into that trap. It is dangerous for Parliament to send ambiguous signals of that kind.
Of course we all hope that clause 158 is drafted in such a way as to make the new general principles as unambiguous as possible—that, in my view, is the purpose of having the new statutory principles—and to remove to the greatest extent possible the scope for legal uncertainty of that kind and, therefore, for legal costs and everything that flows from that. That is our hope, but there will always be an area of doubt—there always is in human affairs. We can be certain that somebody will wish to litigate on some aspect of the legislation, so it is very important indeed that the general framework that the clause establishes for clause 158 should be in no way ambiguous. I fear that the clause might be worse than ambiguous, however; it might actually be contradictory.

David Howarth: The hon. Gentleman makes a good point. There is a difficulty. The clause appears to contain a contradiction, saying on the one hand that we are passing new duties in place of the law, and on the other hand by saying that we can refer back to the pre-existing law in interpreting those duties. There is an added complication in that lawyers tend to think of the common law as still existing in some ghostly way even if a statute has been introduced in that area, so that if that statute were repealed, the common law would spring forth anew. Some people might even think that the common law has developed in the period between the statute coming into existence and being repealed.

Quentin Davies: What the hon. Gentleman, as a distinguished professor in law, is saying is that some lawyers do not think that Parliament ought to exist at all. They think that whatever Parliament does they can safely ignore it. I hope that the hon. Gentleman is with us in saying that that is not the case and certainly should not be so.

David Howarth: The relationship between this place and the courts has always been complex. There was an idea among judges for centuries that, as they used to say, statutes in derogation of the common law should be construed strictly; in other words, they would do what we said, but only to the minimal level to which they were required.
I wonder whether it would be possible to state what clauses 156 and 158 are trying to do.

Mike O'Brien: It might be useful if the hon. Gentleman let us have his view on how duties may flow from common law and equitable principles and then be enshrined in statute using the case law from those common law and equitable principles in the interpretation of that statute. If that is the case, it is clear that the new duties, as set out in a statute, might have effect “in place of”; however, it is equally consistent that in interpreting those general duties a court “shall have regard to” the case law that precedes it.

David Howarth: The Solicitor-General anticipates, in part, a possible interpretation of the subsections that I was about to propose. It was clear throughout the company law review, and in the Law Commission’s report on the same matters, that the statutory statement of directors’ duties was intended to reflect a refined version of where case law has got to. Because part of our intention in passing the statute is to put into statutory form what already exists in some other form in case law, it would be legitimate to refer back to existing case law, because that would tend to clarify, rather than make more confusing, what we are doing. That is consistent with what the Solicitor-General said. Because the origin of many of the duties in the statute is in common law, being able to refer back to those common law principles and cases would make the statute clearer, rather than less clear.
On the other hand, another intention of the statute is to clear up particular areas of case law where there is ambiguity, difficulty and confusion. Eventually, we will get to clause 222 on ratification, which is a notorious area of difficulty and confusion in the law. In that clause, as in some of the clauses that we are about to consider, there is an element of clearing up existing problems. Presumably, in those cases—I advance this as a possible interpretation—the Government intend, and are asking Parliament to intend, that it should not be right for judges to go back to those old cases and so reproduce all over again the difficulties that Parliament intended to resolve. We therefore have a two-stage effect: in the first stage, we move from case law to statute; in stage two, we can refer back to case law, at least where it helps to clarify, but not where the effect would be in the opposite direction.

Quentin Davies: The hon. Gentleman is trying to be helpful to the Committee and is offering an interpretation that may or may not be consistent with the text before us, but does he not agree that there is a real problem, given that the text before us goes along one of the routes that he describes in subsection (3), but says exactly the opposite in subsection (4)?

David Howarth: The hon. Gentleman anticipates my next remark perfectly. If I have given a correct, or nearly correct, version of what the Government intend, the remaining question is how that fits with the wording of subsections (3) and (4). Will the Solicitor-General explain how the intention of Government—and Parliament—to do that very thing would be realised by the wording before us? The hon. Member for Grantham and Stamford makes the important point that, on the face of it, the subsections do not allow that to happen.

Mike O'Brien: To deal with the point raised by the hon. Members for Grantham and Stamford and for Cambridge, our intention is that the principles and duties that apply to directors will flow from the common law and equitable principles and that they will be set out clearly in statute so that a member of the public wishing to know what they are will be able to see them. However, because many of those duties have flowed from the common law and equitable principles and there is case law, when interpreting those duties it will be appropriate, where applicable, for the courts to have regard to that pre-existing case law.
It is therefore right, and properly drafted in subsection (3), that the duties will
“have effect in place of”
the existing principles. That is the correct wording, which means mean that the duties will have effect in place of some general duties that were framed in various cases. We are bringing those duties together and codifying them so that everyone can clearly see them without having to refer back to a bundle of cases. However, when in due course the courts arbitrate a dispute between people about how the duties should be applied, as subsection (4) states, they will be able to have regard to previous case law where applicable.
There is no problem with the drafting. The hon. Member for Grantham and Stamford is agitated by it, but I do not think that a judge will be. A judge will know exactly where we are coming from.
The amendments provide a good opportunity to look at broader circumstances and issues. The Law Commission noted in its report on formulating a statement of duties that the general duties of directors are
“fundamental to the relationship between a director and his company”.
We agree, and we welcome the detailed scrutiny that the clauses had in another place.
It may well help if I provide a short history so that the Committee knows where the proposals have come from. It is only fair to say that from the 1920s onwards there have been differing views on the desirability of setting out in statute any general statement of directors’ duties. Members who wish to know more about the historical background will no doubt be delighted with the helpful summary in part 13 of the Law Commission’s joint consultation paper entitled “Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties”—and fascinating stuff they will find it.
Back in 1926 the Greene committee suggested:
“To attempt by statute to define the duties of directors would be a hopeless task.”
The Cohen committee made recommendations in 1945 on the financial relations between companies and directors, but expressed no view on directors’ duties. In 1962 the Jenkins committee recommended a non-exhaustive statement of the basic principles underlying the fiduciary duties which a director owed to his company. That recommendation was to have been implemented by clause 52 of the Companies Bill of 1973, but it got lost in the changes caused by the 1974 general election.
The Labour Government’s Companies Bill of 1978 contained a longer statement of directors’ fiduciary duties and provided that it would take effect in place of any other rule of law stating those duties, although without prejudice to any remedies available for a breach of duties. The Bill fell at the 1979 election and was reintroduced by the incoming Government at the end of 1979 without the statement of general fiduciary duties. Meanwhile other common law jurisdictions, such as Australia and New Zealand, proceeded with a partial codification of duties. In 1997 the Government asked the Law Commission to consider the case for statutory statements of duties owed by directors to their companies under the general law, including their fiduciary duties and duty of care.
In its report the Law Commission recommended that there should be a statutory statement of a director’s main fiduciary duties and his duty of care and skill. The company law review supported the Law Commission’s recommendation that there should be a legislative restatement of directors’ general duties, although it was doubtful about the case for leaving the field open to judges for development of new general principles. Instead, the company law review recommended that the restatement be treated as exhaustive. It set out a trial draft statutory statement of directors’ duties in its consultation document, “Modern Company Law for a Competitive Economy—Developing the Framework”, and a revised statement of directors’ general duties appeared in its final report. 
Part of the statement was intended to reflect the current state of the fiduciary duties in common law. Other parts of the statement were intended to make changes to the law. In July 2002 the White Paper “Modernising Company Law” agreed that directors’ general duties to the company should be codified in statute, largely as proposed by the company law review, but without the inclusion of any duties in relation to creditors. A revised version of the statement was published in March 2005 in the Government White Paper on company law reform. The latest version containing some revisions now appears in the Bill.
It may be useful, given the points raised by the hon. Members for Huntingdon and for Cambridge, if I explain why the Government believe that there are arguments for a clear codification of the duties. I should like to explain why I believe that the Law Commission and the company law review were right to recommend that there should be that statutory statement of duties.
The Law Commission noted that the law in this area should
“aim to educate and inform directors and not merely impose liabilities on them”.
This area of law is therefore important. It ought to be accessible; it ought to be comprehensible; and it ought to be clear to directors and advisors. The singular benefit of codifying is that there is no longer a need to roam over the vast array of authorities in order to discover what the law really is and to carry out a textual analysis of what the judge really meant. It is important that directors can see what their main duties are. Directors’ general duties lie at the heart of company law and it is simply not acceptable that they are treated as some sort of arcane law, accessible only to specialist lawyers who know the case law. That is the main reason why codification is necessary.

David Howarth: The Solicitor-General is making an excellent case for subsection (3). The trouble is that he seems to be making a case against subsection (4).

Mike O'Brien: I cannot see how on earth that is the case. I have said right from the beginning that our objective is to use the law as it has developed to inform us as we set out the duties, so that directors know when they begin their job what those duties and obligations are. Then, when it comes to a dispute, the courts can look at the duties and inform themselves from subsection (4) about previous case law and how it applied to those duties. They will thus be better informed about how they can resolve the dispute.
I do not expect the average director who is not a lawyer to be particularly interested in subsection (4). He will want to go to the later clause and ensure that he knows what those duties are. If he is a former director or a shadow director, the provisions will obviously apply to him too. Subsection (4) gives judges the ability to say that Parliament wants them to look at case law, where it applies to the general duties set out in statute, and to use that case law to inform how they interpret the issues in dispute before them.
It is perfectly straightforward and simple. In practice, it may be perfectly simple for a judge, but that does not necessarily mean—and nor need it mean—that it is perfectly simply for the layman. As far as the layman is concerned, the lay director needs to know what his general duties are and to whom he owes them. That is what we are setting out in statute. If they have a problem with that and an argument or a dispute arises, can they go to a judge and can their lawyer advise them about what the judge is likely to do about it? My lawyer can go to the case law and say, “Well, this case law applied to that duty, so looking at the way in which the case law developed in recent decades I suggest that the judge is likely to do this.”

Jonathan Djanogly: In practice, people will not read the provisions and then go to their solicitor to hear about case law. They will still have to go to counsel, as they always had to.

Mike O'Brien: The former will be the case if a dispute arises. We are doing two separate things. First, we are ensuring that the lay director is able to know what his duties are. Secondly, if there is a dispute within the company about those duties and how he or someone else on the board interpreted them, that dispute can be resolved by the courts or is likely to be resolved by the courts. It may well be that because previous case law is not entirely clear on a particular point the matter will have to go to court and new case law will have to develop. However, in developing that new case law, previous case law may be used to inform it. Subsection (4) makes it clear that that previous case law can be used and that a judge can have regard to it when seeking to resolve the issues.

David Howarth: I understand what the Solicitor-General is saying. The difficulty is that the clause does not distinguish between those bits of case law that are legitimate to use under the Bill and those parts that are not. There is nothing in the Bill that says which parts of the law are being reformed. For example, in existing case law some cases make a distinction between a disability and a duty. Consequences flow in different ways from disabilities and from duties. As drafted, the provision makes no reference to the concept of disability; it is all about duty. There is no concept of a director not being able to produce a certain legal effect. It is all about having a duty not to act in a particular way or to act in a particular way. The problem is that, as it stands, the clause does not refer to that particular reform—and it is a reform—so it is unclear whether case law should or should not be referred to.

Mike O'Brien: Case law does not point to every issue that might come before the courts. It tells the judge that when looking at clause 158 on the duty to promote the success of the company and the various issues that we shall come to in due course, some of the issues will have case law attached to them and some will not, or some will have case law that deals with a specific aspect but not all of it. Subsection (4) enables the judge to look at that and say,
“The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.”
So the judge knows that, where it is relevant, he can go back and look at the case law and apply it. It will not always be applicable and the choice is whether we go through the background of the case law and somehow try to squeeze it into a clause that states what the judge has, and has not, to have regard to—but we are not doing that. We are saying that, by and large, judges are sensible people—note that I include a caveat, as all good lawyers do—and able to look at the case law and determine what is, and is not, applicable. That is a perfectly sensible approach.
In the process of codifying directors’ duties, we have always been intent on setting out a clear list so that directors will know what their job is, what their duties are and what they are supposed to be about. If they read the statutory statement, they should know where their obligations lie. When a dispute arises, they can go to the courts, as they normally would. We are not trying to rewrite everything or, as the hon. Member for Grantham and Stamford fears, starting from year zero. We are not trying to do that. Subsection (4) makes that clear, which is why it is important that it remains in the Bill.
The principal argument against codification is that there might be a lack of flexibility. That is why, in line with the Law Commission’s recommendations, we sought to draft the various duties in broad and general language. We also chose not to attempt codification in areas that are not clearly settled, such as the duties that may exist towards creditors in the run-up but before the onset of insolvency. We have not sought to create new law in respect of such issues.
A second argument against codification is that the statement could lead to uncertainty about the extent of the duties—hence we are using subsection (4) to inform the courts and ensure that we do not get unnecessary uncertainty. There will always be some uncertainty, as the duties must be developed in the future, but we are helping judges and directors to know what their main duties are and then giving them the right to refer to the case law.
Subsection (3) explains the origin of the general duties set out in the statutory statement. It tells the courts that each general duty is derived from an existing common law or equitable principle and that the statutory statement replaces the common law or equitable principle. It makes it clear that the statutory statement does not create new duties in addition to those that exist under the common law. Instead, any common law rule or equitable principle applying to directors and covering the same subject matter is replaced by the statutory statement.
The deletion of subsection (3) would remove that useful information from the Bill. In particular, deleting the second half of the subsection, as amendment No. 159 proposes, would risk making directors subject to two overlapping regimes—one under the common law and one under statute—thereby creating additional burdens on directors. That would lead to complete confusion, which is why we feel that it would be inappropriate.
Subsection (4) directs the courts to interpret and apply the statutory statement using common law and equitable principles. It helps to preserve the flexibility of the courts as to how they interpret and apply the general duties in response to the broad range of different circumstances that may come before them. It achieves the right balance, making a clear and accessible statement of the duty without creating rigid rules and losing the flexibility that the courts need to develop this area of company law. That is why the general duties are expressed in such general terms and why subsection (4) tells the courts to treat the duties as general principles.
The courts should continue to refer to existing case law on the corresponding common law rules and equitable principles, except where it is obviously irreconcilable with the statutory statement. The rich body of case law on and wisdom about the general duties may continue to be used. No one would benefit from abandoning the wisdom accumulated over several centuries—we do not propose to lose that.
Subsection (4) also acknowledges that the common law rules and equitable principles applying to directors did not develop in isolation. Although it might be said that the unique position of directors results in certain rules derived from aspects of trust and agency law being applied to them in a distinctive manner, the rules are still very much manifestations of wider principles. The statutory statement replaces the common law rules and equitable principles that apply to directors, but the rules and principles will continue to apply to trustees, agents and other fiduciaries.
Subsection (4) enables the courts to continue to have regard to developments in the common law and equitable principles applying to other types of fiduciary relationships. That should enable the interpretation and application of the statutory statement to keep in line with relevant developments in the law as it applies elsewhere.
The deletion of that subsection would therefore remove important guidance for the courts on how the general duties are to be interpreted and applied. It would stifle development and constrain the courts. I cannot believe that the hon. Member for Huntingdon would seek to stifle and constrain the courts in that way. It would lead to a lack of predictability, and a narrowness and inflexibility that would go against the broad thrust of our aims, which I think people support.
Amendment No. 162 would not improve the drafting of the Bill. The general duties are indeed based on common law rules and equitable principles applying to directors. Once the general duties come into force, those will no longer apply to the directors, as subsection (3) points out—the general duties will apply in their place.
Subsection (4) points the courts towards the existing law, and those common law rules and equitable principles, but the law must be able to continue to develop after the duties come into force and the relevant case law should also take them into account. Subsection (4) provides for an evolving and flexible interpretation and application of the duties by requiring the courts to treat the statement of general duties as if it were common law. It also enables the courts to have regard to developments in the common law rules and principles as they apply to other fiduciary relationships.
It seems that we have a clear view of where we want to go. Opposition Members are right that there is not clarity on every issue, but such clarity is not in the law at the moment. Other than seeking to invent it, or to impose a new version, we will be best placed by using what we have got and codifying the directors’ duties to enable the courts to use case law in order to interpret them where applicable. That will ensure that courts can resolve easily issues that arise in disputes between companies and within companies.
I hope that, with those observations, hon. Members will not press their amendments to a Division.

Jonathan Djanogly: I thank the Solicitor-General for fully setting out the position. It has given all parties further information with which to consider the issue at a later stage.
I shall go over the debate and pick up on the points as I heard them. First, my hon. Friend the Member for Grantham and Stamford made an excellent contribution. We might not agree on all aspects of this part, and that might well be the case with later clauses, but on the matter before us we are in full agreement. His analysis of subsections (3) and (4) was very good. He also unlocked the door to the inconsistency in the approach of the provisions.
The hon. Member for Cambridge built on that and gave an astute analysis of the possible complexities arising from the application of the provisions. The Solicitor-General said that people should be able to know what their equitable duties are and so they should be set out in the Bill. I think that that is more of a clause 158 debate. The point is that there are hundreds of equitable common law duties and to place just some of them in statute would be misleading, rather than of help. However, I shall go into that in more detail later.
The Solicitor-General said that matters would be resolved and interpreted more easily by having such information in the Bill. It is a point of principle for him on which he is relying. I remain of the opinion that that will not be the case and that arguably the position will be more, not less, confused, unless an unnecessary degree of rigidity could be introduced. The fact remains that there is a large and growing body of evidence and opinion that the clause is inconsistent, will change the law and will lead to significant revised interpretation of court cases. Many people are saying that and I am left wondering why the Government are not taking note of the advice that they have received. The answer probably lies somewhere in the length of the Bill’s gestation, which over eight years means that the Government have dug themselves into a set position.

Mike O'Brien: It is difficult given the concessions, including the hard-won concession on even the title of the Bill, to say that we have dug in on anything.

Jonathan Djanogly: The hon. and learned Gentleman voted for it.

Mike O'Brien: The hon. Gentleman put so persuasive a case that he even got my support. I am living proof that there is nothing dug in about our view of the Bill; we are seeking to go about it in a sensible and reasoned way, and we have done that on this clause.

Jonathan Djanogly: I thank the Solicitor-General for reiterating his position, but as far as we are concerned the clause is not going to benefit anyone. That is ultimately our position. It is not going to benefit companies, shareholders or stakeholders. It creates the likelihood of increased uncertainty—the no gain—so why bother? The question is how we take the issue forward at this stage on the basis that we will be looking at how things develop on Report.
We want to make a point and we think that the clause’s weakest link is subsection (4). On that basis, I will ask the Committee to vote on amendment No.163. I beg to ask leave to withdraw amendment No. 161.

Amendment, by leave, withdrawn.

Amendment proposed: No. 163, in clause 156, page 69, line 33, leave out subsection (4).—[Mr. Djanogly.]

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 10.

Question accordingly negatived.

Clause 156 ordered to stand part of the Bill.

Crispin Blunt: On a point of order, Mr. Bercow. I draw your attention to what I think is a gremlin on page 1425 of the amendment paper. There are amendments tabled in the names of the hon. Members for Mid-Dorset and North Poole (Annette Brooke) and for Brent, East (Sarah Teather). The amendments are starred, so plainly they have not been selected for debate today. However, I have yet to identify their full relevance to the Bill before us. I wonder whether you could offer the Committee an explanation.

John Bercow: The hon. Gentleman has raised an entirely valid point of order, which also has the advantage in this case of being correct. It is the consequence of a printer’s error. I know that he will be greatly reassured to be told that the error will be corrected in time for those matters to be reached. I hope that that explanation satisfies him.

Clause 157

Duty to act within powers

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: The clause, based on the existing equitable principle, creates a duty that directors must
“act in accordance with the company’s constitution, and...only exercise powers for the purposes for which they are conferred.”
A report provided by Linklaters said that the use of the words
“purposes for which they are conferred”
could create problems, as the purposes could be unclear.

Mike O'Brien: It is right that the clause codifies the general duty of a director to act in accordance with the company’s constitution and to exercise powers for proper purposes. If the duty were left out of the statutory statement of duties, it would remain part of the common law, and that would do nothing to improve the accessibility of the general duties.
To determine the purposes for which a power is conferred, the articles are an obvious starting point, as it is from those that directors derive most of their powers. Typically in practice, the powers granted to directors by the company’s constitution are drafted in general terms and do not precisely state the purposes for which they are to be exercised. The courts have explained that the process is not an exact one, involving the laying down of precise limits beyond which directors cannot pass. Instead, if a particular exercise of a power is challenged, the courts will determine the substantial purpose for which it was exercised, and reach a conclusion as to whether that purpose was proper or not. The case of Howard Smith Ltd. v. Ampol Petroleum Ltd. is the key one in this area.
In doing that, the courts will necessarily give credit to the good-faith opinion of the directors and respect their judgment on matters of internal management and, indeed, how the company engages in external operations. The courts will take into account the nature of the power and the business practice. That having been done, the ultimate conclusion has to be the side of a fairly broad line on which the case falls. That is typical of the courts’ approach to corporate disputes, giving due respect for directors’ business judgment and not making a close examination of their actions in favour of a more broad-brush approach, so that the directors can have an element of freedom of judgment in how they make a decision.
Nevertheless, whether a power has been exercised for a proper purpose is a question of law, and the directors’ opinion of the propriety of their action is not conclusive. For example, a purpose may be improper even if the directors consider that it is in the best interests of the company. I hope that that explanation deals with the hon. Gentleman’s concern.

Jonathan Djanogly: We have made clear our problem with general codification issues, and that will come up again, but in relation to the definition of purposes, I thank the Solicitor-General for his clarification.

Question put and agreed to.

Clause 157 ordered to stand part of the Bill.
Further consideration adjourned.—[Steve McCabe.]

Adjourned accordingly at fifteen minutes to Four o’clock till Tuesday 11 July at half-past Ten o’clock.